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Thursday June 30, 2005 - 21:20:08 GMT
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Forex: Dollar Under Pressure With Minimal Help From Fed

DailyFX Fundamentals 06-30-05

By Kathy Lien, Chief Strategist of www.dailyfx.com

· Dollar Under Pressure With Minimal Help From Fed
· Pound Continues To Slide On Downward Revision In GDP
· Yen Extends Fall Despite Modestly Positive Data

US Dollar

The Federal Reserve did a great job today of leaving the market calm and settled in light of what could have been a potentially very market moving event. In yesterday's Daily Fundamentals, we said that the FOMC meeting today could very well be a non-event and it indeed has proven to be so. There were no fireworks after the meeting with the Federal Reserve raising rates by a quarter point, right in line with expectations. The Fed raised interest rates for the ninth consecutive time to 3.25 percent, bringing rates 225 basis points higher than the 1.00 percent that they slashed it to back in 2003. Keeping with Greenspan's mode of operation - give them a little, but don't give them too much - the statement was mostly neutral with a just a dash of hawkishness. Despite mixed economic data, the Fed remains pretty bullish on the US economy indicating that the expansion remains firm and that labor market conditions improved gradually. They also added that pressures on inflation have stayed elevated, but also hedged themselves by saying that longer-term inflation expectations remain well contained. The Fed still believes that "monetary policy remains accommodative" and that rates can be increased at a "measured pace." This is pretty much their way of telling us that another rate hike will be needed on August 9th. Unsurprisingly, they gave no new hints about the September meeting, which is really where all of the uncertainty lies, so for the time being (or at least until we get some more decisive economic data), the EURUSD could remain trapped in the 1.20-1.22 range. Other economic releases that came out today were also mixed. Although help wanted ads dipped, jobless claims improved quite a bit, with the numbers suggesting a 150k plus payrolls number next Friday. Chicago PMI edged lower but with far less volatility than the Empire State and Philly Fed surveys. Tomorrow’s ISM report will mostly likely surprise on the downside, but not enough to dip into contractionary territory. Personal income and personal spending both came in marginally weaker than expected.

Euro

Like a tug of war, today is the Euro’s turn to rally. Economic data released overnight was mostly mixed. Right in line with yesterday’s leak, German unemployment fell by 23k in June, but across the border, French unemployment edged marginally higher. Confidence in both France and Italy deteriorated with final revisions to French GDP indicating that despite an upward revision the 0.3% growth that France experienced in the first quarter is still weaker than the 0.7% growth that they experienced in the fourth quarter. Meanwhile ECB members continued to stand behind their decision to keep rates unchanged despite repeated calls by government officials to cut rates in order to spur growth. Yesterday we talked about how Italy was given 2 years to reign in their deficit. Germany announced today that they would be breaching the 3 percent budget deficit limitation for the fourth consecutive year. It will be interesting to see how the EU responds to all this as each country’s blowback to any punishments could far outweigh the sanctions that the EU would put into place. At this point, the EU seems to talking to a group of death men, as no one is paying any heed to their open threats.

British Pound

How the mighty have fallen. Once a pinnacle example of an efficient economy, contraction is now a consideration Bank of England officials may have to deal with. Falling 40 percent from the previous quarters’ expansionary figure, gross domestic product was revised downward to 0.4 percent, subsequently depressing the overall annual comparison. A compendium of lackluster industrial production and consumer consumption data, the lower figure confirms fears earlier expressed through Bank of England governors Bean and Bell, the only two dissenters to the consensus stay on short term repurchase rates. Exacerbating the massive bleeding earlier on, U.K. June consumer confidence also declined for the third consecutive month in a row. Falling to a negative three reading, the decline was reflective of the fact that although consumer spending has slowed according to personal finances, individuals’ outlooks on the overall economy are even bleaker at the moment. This may leave policy officials with their backs against the wall and no other remedy to revive the economy except through a series of interest rate cuts. However, the problem may stem deeper and the answer more complicated if one includes the money supply and ballooning consumer credit figures from yesterday.

Japanese Yen

Released during the session, positive economic data for the world’s second largest economy did nothing to deter bears from dominating in the market. A bright spot for the region, small business confidence eeked out a gain on the month as sentiment looks to have turned up on recent optimistic figures. In addition, housing demand from abroad may have finally spilled over into the region with housing starts remaining for the second straight month while construction orders remained positive for its third. This lends considerable weight to earlier notions that the country may be ready to drive forward in the global market instead of pacing around aimlessly. Additionally, it now bolsters expectations of an exit scenario regarding deflationary pressures and raises speculation on any potential interest rate considerations. However this is unlikely in the short term, as we have been reminded on numerous occasions by policy officials and of their intent to hold out till considerable expansion is witnessed.

 

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